Key Questions Mutual Fund Investors Should Ask

1. What are the fund’s expenses? There is a significant correlation between fund expenses and long-term returns. The internal expense ratio is a compilation of various management and portfolio expenses. Different kinds of funds may cost more or less to operate. But, the fund you pick should be at or below the average for funds of its type.

2. What is the turnover rate? High turnover rates (more trading in the portfolio) are expensive. This, in turn, increases the expense ratio. Besides that, stocks or bonds sold at a gain may generate a taxable distribution later in the year. Shareholders prefer not to pay taxes on these capital gains distributions, so funds with lower turnover are popular for taxable accounts.

3. What is the investment style? Performance tends to follow sectors. So, when small cap value funds prosper (not lately), most funds managed in this style will prosper, too. It helps to know each fund’s style in building a diversified portfolio. Funds that drift often arrive at a hot sector too late in the game.

4. Who manages the fund? Not the fund family, but the actual portfolio manager. How much experience do they have? Are they responsible for past performance, or has that portfolio manager moved on to better things?

5. What is the fund’s policy towards holding cash? Cash (in the form of short-term government bonds) is a drag on stock portfolio performance in rising markets. It also provides a cushion when they fall. Who should make strategic cash calls? In general, I’d rather have all stocks in the fund and hold cash (if any) on my own.

6. What are the returns? Compare fund returns with similar investments and time frames. Look towards other funds with similar objectives before deciding whether to buy or sell. Seek good longer-term performance.

No one knows what the future holds, so every investment choice, in that sense, is a guess. But we can stack the odds in our favor by making reasoned, informed, choices.